Government pensions get a makeover
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Government pensions get a makeover
Faced with unfunded liabilities between $288 billion and $500 billion, California Gov. Jerry Brown has announced a government pension reform proposal that would marry elements of the traditional defined benefit plan and a defined contribution plan. “Current benefits, contributions and retirement ages don’t reflect the changing demographic realities we face and are not sustainable,” the Democrat said in a letter to state leaders. “Continuing these plans in the current form will put taxpayers on the hook for substantial costs now and in the future. Urgent and decisive action is imperative.”
Although no legislator has yet introduced the governor’s bill, and its prospects are unclear, the governor’s office remains hopeful. “The timing is right to move ahead on this issue,” says H.D. Palmer, a spokesman for Gov. Brown.
California is only one of the many states that have either moved to a so-called “hybrid” pension system or are considering plans that would begin to shift the burden for retirement savings from the employer onto employees sharing some benefit risk. While consideration of using this blend of pension plan systems is rising, actual implementation has been limited thus far.
“We see a lot of interest in this plan type,” says Kim Nicholl, public sector retirement plan leader for New York-based The Segal Co., a pension consultant. “The hybrid has both defined benefit and defined contribution components. There are all kinds of variations.”
In some states, the changes in public sector benefit plans the last several years have been dramatic:
- In Rhode Island, most employees were enrolled in a defined contribution plan with a 1 percent match, while the defined benefit plan rules changed eligibility, increased contribution rates and suspended cost-of-living-adjustment (COLA) increases for future retirees until plan finances improve.
- In Utah, new workers can now choose to participate entirely in a defined contribution plan, or they can participate in hybrid plan, which includes a defined contribution component plus a defined benefit element with fluctuating contributions based on the plan’s financing.
- In Michigan, new school employees contribute to a defined contribution plan (which is optional), while the employer’s contribution includes a partial match to the defined contribution plan and a reduced rate on the defined benefit plan. It no longer includes a COLA. Many municipalities participating in the Municipal Employees’ Retirement System of Michigan have established hybrid plans as the primary retirement benefit for their employees.
Not surprisingly, those plans have drawn mixed reviews, based on which side of the bargaining table the person sits. More importantly, some fear that the public sector, which has relied heavily on the notion of a secure retirement to draw good employees to its workforce, will suffer in its recruitment and retention. “Rather than teaching math, good people will become accountants,” says Doug Pratt, director of public affairs for the Michigan Education Association. “We need good people in public education to prepare our nation’s workforce.”
Ok, so we have effectively
Ok, so we have effectively reduced the pension programs in 41 states. They are becoming more like the private sector. Of course, as we move to compensation similar to the private sector are we going to get their little goodies – such as profit sharing, bonuses, stock options? Oh wait, there is no profit motive in government, so no bonus or profit-sharing. How about that stock option, not there either.
I believe that the law of unintended consequences will kick in, particularly at the senior management level. Why work 50 or 60 hours with more responsibility for less pay? The brain drain will be dramatic.
Exactly.
Exactly.
My concern in reading
My concern in reading articles like this is that they describe define benefit plans as “Funds are invested by the fund (and its professional managers), and the responsibility for the benefit falls entirely to the employer. If investments do not meet expectations, employers must add funds from their general operations.” They don’t seem to mention that in years where the funds returns exceed expectations that the entire benefit goes to the employer too. That is the fundamental nature of these plans using a expected return from their investments. Meaning there will times when it exceeds and times it is below, but continued investment returnss will be averaged out over the longer term. No one seems to talk about all those years when the rate of return did exceed the expectation, and the cities/employeers pocket the extra return and stopped making their contributions, but now when we are below these expectations these DB plans are unsustainable.